Summary
- GOOG's Q1 2022 top line is likely to meet market expectations, taking into account selected alternative data and the company's excellent Q4 2021 financial performance.
- However, GOOGL's first-quarter bottom line might disappoint the market, as a result of higher-than-expected staff costs and sustained investments for Google Cloud.
- Google stock is a Hold ahead of Q1 financial results, as the company's shares are fairly valued and I don't expect an earnings beat for the upcoming quarter.
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Elevator Pitch
Alphabet Inc. (NASDAQ:GOOG) (NASDAQ:GOOGL), which many investors still refer to as Google (its former corporate name), is reporting its Q1 2022 financial results on April 26, 2022 when the market closes. I expect GOOG's first-quarter top line to be in line with what the market is forecasting. But I see Alphabet's upcoming quarterly earnings disappointing Wall Street due to larger-than-expected costs and investments. In addition, GOOG's valuations are not particularly enticing at the moment, and this provides further support for my Hold investment rating prior to Q1 earnings release.
GOOG Stock Key Metrics
Before I preview GOOG's upcoming first-quarter earnings, it is necessary to evaluate the key financial metrics associated with the company's most recent quarterly Q4 2021 financial results.
Alphabet's top line grew by +32% YoY from $56.9 billion in the fourth quarter of 2020 to $75.3 billion in Q4 2021, while GOOG's diluted GAAP earnings per share expanded by +38% YoY from $22.30 to $30.69 during the same period. GOOG's revenue and bottom line were +5% and +13% above the Wall Street analysts' Q4 2021 consensus forecasts of $71.8 billion and $27.28 per share, respectively.
GOOG's fourth-quarter earnings was mainly driven by higher-than-expected revenue, rather than better-than-expected profitability. According to financial estimates sourced from S&P Capital IQ, Alphabet's Q4 2021 operating profit margin of 29.1% was largely in line with the market consensus' operating margin forecast of around 29%.
Instead, it was Alphabet's Google Search and Google Cloud businesses' above-expectations top line which helped the company to deliver an impressive earnings beat for the final quarter of last year. As per S&P Capital IQ data, Google Search's revenue rose by +36% YoY to $43.3 billion in Q4 2021 and exceeded the sell-side consensus forecast by +6%. Google Cloud's sales increased by +45% YoY to $5.5 billion in the fourth quarter of 2021, and this was +2% higher than what the market had anticipated.
One key factor for Google Search's good performance in Q4 2021 was the launch of new features relating to promotions during the holiday season which were well-received. Alphabet disclosed at its Q4 2021 results call that "the number of merchants using promo features jumped 280% year-over-year" in the recent quarter.
Another key factor supporting strong growth for Google Search is that Alphabet's investments in improving search quality continue to pay off. GOOG emphasized at the recent quarterly earnings briefing that information is "getting increasingly multimodal in nature" and it highlighted that Google will be able to "introduce new ways to search with images and words simultaneously" going forward. This is made possible with Alphabet's investments in "new AI (Artificial Intelligence) models" which should allow the company to maintain its market leadership in search for the foreseeable future.
Separately, Google Cloud saw its total deals and deals above a billion dollars grow +80% and +65%, respectively in Q4 2021. Looking ahead, GOOG revealed at the company's fourth-quarter earnings call that its "backlog increased more than 70% to $51 billion, most of which is attributed to Google Cloud." This sends a positive signal about Google Cloud's growth prospects for 2022.
In summary, Alphabet's Q4 2021 financial performance was good in absolute terms and also exceeded market expectations.
When Does Google Report Earnings?
Google will release the company's earnings for the first quarter of 2022 on Tuesday, April 26, 2022, after trading hours. In the next two sections of the current article, I will discuss expectations and forecasts for GOOGL's Q1 2022 financial results.
What To Expect From Earnings
I have a mixed view of Alphabet's upcoming Q1 2022 earnings.
On the bright side of things, GOOG's Q4 2021 results were excellent which is indicative of positive growth momentum (especially for Google Search and Google Cloud), and certain alternative data also point to a good Q1 2022 for the company.
Financial data provider, Refinitiv, defines alternative data as "non-traditional data that can provide an indication of future performance of a company outside of traditional sources, such as company filings." The takeaways from channel checks with different industry players as per selected research reports indicate that GOOGL's revenue growth for the upcoming quarter should be decent and in line with market expectations.
A Jefferies (JEF) research report (not publicly available) titled "YouTube/FB Expert Call Recap" published on April 19, 2022 noted that "a marketing agency expert whose company helps advertisers manage YouTube and social ad campaigns" mentioned that "the channels that saw increased spend in Q1 were mostly GOOGL and TikTok." Separately, another research report (not publicly available) with the title "Our Discussions with Ad Buyers into 1Q Earnings" released by Piper Sandler highlighted that "a digital marketer" estimated that "1Q spend (for Google) was +13% y/y, outperforming budget by ~2%." These alternative data seemed to imply that Alphabet's top line growth should remain robust in the first quarter of this year.
On the negative side of things, higher-than-expected costs could be a substantial drag on GOOG's profitability in the upcoming quarter.
One key area to watch is recruitment. Alphabet guided at its Q4 2021 investor briefing that "we do expect the strong pace (of hiring) to continue" after already having increased the company's staff strength by close to 6,500 in the last quarter of 2021.
Another key area to monitor is the losses for Google Cloud. Google Cloud's operating losses narrowed from -$1,243 million in Q4 2020 to -$890 million in Q4 2021, and this meant that the business' operating margin improved from -32% to -16% over the same period. But it would be unrealistic to expect Google Cloud's losses to narrow substantially in Q1 2022 or full-year 2022. Alphabet stressed at the Morgan Stanley (MS) Technology Media and Telecom Conference 2022 in March 2022 that "in the near-term, we're continuing to invest across the board to support Cloud."
Apart from recruitment and continued investments in Google Cloud, inflationary cost pressures are another factor which could lead to Alphabet's actual expenses for Q1 2022 coming in higher than what the market expects.
What Is Google's Forecast?
GOOG's strong revenue growth momentum from Q4 2021 and positive takeaways from specific alternative data suggests that the company should be able to meet or even exceed Wall Street's consensus top line growth forecast of +23% YoY for Q1 2022.
But I expect a slight earnings miss for GOOGL. The sell-side analysts see Alphabet's non-GAAP adjusted earnings per share declining by -3% YoY to $25.55 which I think is still too optimistic considering the likelihood of higher-than-expected expenses as I alluded to in the preceding section. My forecast of GOOG's Q1 2022 EPS is $24.50, which is -4% below what Wall Street is currently expecting.
It is also noteworthy that the sell-side analyst consensus Q1 2022 EPS for Alphabet has been raised by +3.4% in the past three months following GOOGL's fourth-quarter earnings. In my opinion, this sets the stage for earnings disappointment, as I would have expected the consensus bottom line forecasts to be revised downwards instead.
Is GOOG Stock Overvalued Now?
I view GOOG stock's valuations as fair, rather than overvalued.
Alphabet's current consensus forward next twelve months' EV/EBITDA of 12.1 times as per S&P Capital IQ is just slightly below the stock's 10-year average EV/EBITDA multiple of 12.3 times.
The 20.7 times consensus forward next twelve months' normalized P/E multiple for GOOG now is aligned with the company's future top line expansion and ROAs (Return on Assets). According to S&P Capital IQ, Alphabet's consensus forward FY 2022-2024 revenue CAGR is +15.7% and its average forward ROA (Return on Assets) over the same forecast period is 21.5%.
Is GOOG Stock A Buy, Sell, or Hold?
GOOG stock is a Hold. The stock's current valuations are fair and support my Neutral view on the company's shares. As discussed above, I am of the view that the upcoming earnings announcement will not be a positive re-rating catalyst for the stock.
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